Frivolous lawsuits diminish California’s competitive edge

No one denies that California has a daunting road ahead as the state works toward economic recovery. As a business owner, I certainly don’t have all the answers, but I do know that legal reform would be a step in the right direction. California’s legal climate consistently ranks among the worst in the country. At a time when many businesses are closing or relocating out of state, legal reform could go a long way to eliminate unnecessary costs, save and create jobs and keep businesses open.

As a businessman in this community, I have personally experienced harassing shakedown lawsuits — and I know the consequences are serious. “Abusive” lawsuits, those legal filings based on petty technical or interpretative violations, powerfully and negatively impact both the private and public sectors — and benefit no one but the plaintiffs’ lawyers who seek out the cases.

A recent poll by California Citizen’s Against Lawsuit Abuse (CALA) shows voters are now making the connection between lawsuits and lost jobs. Eighty-one percent of people surveyed believe the number of lawsuits filed against businesses in California hurts California’s economy and 63 percent believe lawsuit reform will make it easier for California to keep businesses in the state. Yet the California legislature, flush with campaign contributions from the plaintiffs’ bar, continually blocks legislation to reform shakedown lawsuits and class action lawsuit abuses. California businesses are vulnerable to relocation appeals by other states like Nevada and Texas because our legal policies fail to protect our businesses.

In Texas, they have created such a strong commercial climate — especially through a package of legal reforms — that businesses are rapidly relocating to that state. In 2008, of all the jobs created in the U.S., 52 percent were in Texas. Recently a report issued by a key Texas economist, Dr. Ray Perryman, showed that lawsuit reforms enacted in 1995 have resulted in $112.5 billion in annual spending in Texas, nearly 500,000 new permanent jobs and a $2.6 billion increase in state tax revenues.

A few weeks ago, the Orange County Business Journal reported Texas Gov. Rick Perry was trying to convince Automobile Club of Southern California CEO Tom McKernan to bring his jobs to Texas, at the very same time McKernan was working statewide to turn California’s economy around. A corporate recruiting tool commissioned by the Texas Public Policy Foundation includes a “Texas vs. California” scorecard. Its 32-page report shows California has higher overall taxes, more regulations, slower economic growth, worse government policies, and poorer prospects than Texas for the 21st century.

Other states are mimicking this aggressive recruitment behavior. Nevada recently spent $1 million on an ad campaign telling California businesses to “kiss their assets goodbye” and move to Nevada, another state with a less hostile business climate. In the ads, Nevada touts the fact that they have no corporate income tax or personal income tax, much lower worker’s compensation costs, and a reputation for a reasonable liability environment. Doing business in the “sue you” state of California is a gamble with so many plaintiffs’ lawyers playing the lawsuit lottery with small businesses. The end result — Nevada’s revenue increased by nearly $5 billion.

The consequences of lawsuit abuse are widespread and serious, and negatively impact both the private and public sectors. Local governments in just five Southern California cities and counties spent more than $276 million in settlements, verdicts and outside counsel costs in just two recent fiscal years. This exorbitant expenditure could have been used for needed public services or infrastructure. In health care, “defensive medicine,” those unnecessary tests and procedures given just to avoid lawsuits, adds $60 to $120 billion to our nation’s health care costs each year, enough money to have insured hundreds of thousands of people.

It’s time California’s legislators listen to voters. Ninety-four percent of the people CALA surveyed think the legislature should enact reforms to attract more jobs to California and to retain the jobs we have. Unfortunately, our Legislature often ignores both the public will and the interests of our small businesses — and our economy is suffering the consequences. It is not too late to improve California’s competitive position, but it is absolutely time that our Legislature demonstrates some political will — and some economic sense.

David Houston is the chair of the California Citizens Against Lawsuit Abuse and the owner of Barney’s Beanery.